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Treatment of Natural Persons and Other Business Forms under Corporate Tax

This article explains the specific tax considerations for natural persons, sole proprietorships, partnerships, and corporate entities, illuminating the diverse facets that define the tax landscape. Thus, to effectively determine taxability and ensure compliance with the corporate tax law, it is advisable to seek the expert services of top benefits Tax Consultants in UAE.  

Taxability of Juridical Person

In the UAE, a juridical person is defined as a legal entity with its own distinct identity. When engaging in transactions or arrangements with a juridical entity identified as a Related Party, strict adherence to the arm’s length principle is essential for Corporate Tax compliance. This means that even if there’s a natural person behind the legal entity, specific rules apply to ensure fair and transparent tax practices.

The arm’s length principle is an internationally recognized standard that ensures transactions between related entities are conducted under terms and conditions that would apply to transactions between unrelated, independent parties. In essence, the arm’s length principle prevents the artificial manipulation of prices or terms in transactions between related entities to shift profits or tax liabilities. When a natural person is involved with a juridical person as a Related Party, tax authorities scrutinize the fairness and market conformity of the financial arrangements. If the terms of the transaction deviate from what would be expected between unrelated entities, adjustments may be made to ensure that the taxable income accurately reflects the economic reality of the transaction.

Sole Proprietorship

A sole proprietorship, owned and operated by an individual, lacks a legal distinction between the business and its owner. This integral connection results in the two entities being treated as synonymous for Corporate Tax purposes. The individual proprietor exercises direct control and assumes unlimited liability for the business. Consequently, the natural person conducting the sole proprietorship becomes the Taxable Person, consolidating personal and business income for tax assessment. This unique tax treatment underscores the inseparable nature of sole proprietorships, emphasizing the personal responsibility and integrated financial identity of the individual proprietor within the framework of corporate taxation.

Unincorporated Partnerships

Unincorporated partnerships, established through contractual agreements among two or more individuals, present a nuanced tax scenario. Usually, each partner is regarded as an individual Taxable Person, and their share of the partnership’s income is subject to personal taxation. However, with approval from tax authorities and meeting specific conditions, the partnership itself may be designated as a Taxable Person. This distinction alters the dynamics, shifting the tax liability directly to the partnership rather than its partners. This unique feature allows unincorporated partnerships to potentially streamline their tax obligations under certain circumstances, highlighting the flexibility inherent in the treatment of such business structures within the framework of Corporate Tax.

Family Foundation

When establishing a Family Foundation, individuals are presented with varied taxation options. Depending on the selected structure, such as a contractual trust, private trust company, or foundation, a Family Foundation may acquire the status of a juridical person—a legal entity with its own distinct identity. Once a Family Foundation attains this status, it becomes subject to Corporate Tax. An intriguing alternative emerges: the Family Foundation has the option to seek treatment as an Unincorporated Partnership. This choice makes the foundation transparent from a Corporate Tax perspective, meaning that the tax obligations are attributed directly to the foundation itself rather than its members. However, for this option to be viable, the foundation must abstain from engaging in activities classified as Business or Business Activity according to Corporate Tax Law. This approach offers flexibility in the taxation treatment of Family Foundations based on their chosen structures and activities.

Choose Tax Consultants in UAE

As aforementioned, distinct tax considerations apply to individuals, sole proprietorships, partnerships, and corporate entities, highlighting the various aspects that shape the tax landscape. Therefore, to accurately assess tax implications and guarantee adherence to corporate tax regulations, it is recommended to enlist the expertise of leading Tax Consultants in Dubai. Thus, contact us today and we shall be glad to assist you. 

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Shayan Khan is an experienced Corporate Tax Consultant with over 4 years of expertise. He's skilled in negotiating and investigating taxes with government bodies like the Federal Tax Authority. Shayan excels in reviewing and drafting tax documents and offers strategic advice on complex tax matters. Clients trust his guidance in navigating tax procedures and minimizing liabilities. Read more